Saving for a rainy day: managing without full-time employee benefits

As a contractor working through a limited company you must get accustomed to certain differences between you and a PAYE (pay as you earn) employee. Effectively you work for yourself, and therefore there is a great deal more responsibility upon you individually in terms of finances. In particular, managing without full-time employee benefits need your attention, and plans for how you deal with the loss of sick pay, holiday pay and pension plans are of great importance.

Sick pay and holiday pay

Generally speaking, you will not get either of sick or holiday pay from a company or client you are working for. This is one reason why contractors are a popular option for some companies – they cost less!

Contractors are usually employed due to specialist skills they may have that employees at the company might not possess. As a result of this you will generally be paid more for your services and can use this to compensate for any sick or holiday leave you may need to take over the year.

Working from contract to contract means you have a great deal more flexibility in terms of where and when you work. This means holidays can be planned around contracts and the costs can be accounted for while you are working.

In terms of sick pay, again, there usually won’t be any. A good way of covering yourself if you have to take a few days off due to illness is by putting some money aside in an emergency fund.

The Professional Contractors Group (PCG) suggests that this is a good way to account for any unforeseen events that could happen in the future.

This can include a long-term illness or lengthy gap between contracts. According to the PCG the best way to go about this is by keeping a sum of easily accessed cash within your company – this allows a contractor to save on unnecessary tax bills.

By using company funds you can draw a salary while temporarily out of work. The size of an emergency fund is down to the individual. As no one can know what the future holds it is safest to have at least six months of personal finances at the ready, as recommended by the PCG.

Income protection insurance

Another way to protect yourself from loss of income is to put into place certain relevant insurance policies. The PCG suggests that this is something contractors should strongly consider as a precaution against illness. Income protection insurance will pay out a monthly salary to you if you are unable to work due to illness.

These types of policies should be heavily scrutinised beforehand as what they actually cover can differ. For example, usually you will not be covered if you lose your job, only if you cannot work due to ill health. It is also advisable to choose a policy that will pay out on the basis of your own occupation…. If you are unable to do your specialist job but can still carry out other menial tasks you may not be covered.

Pensions

With all the talk about pensions over the last year, it has been pretty much impossible not to think about it. The government are very keen to encourage the public to save for their future and ensure they are not left out of pocket when it is finally time to call it a day on your career.

To take full advantage of the tax allowances that a pension plan offers to contractors, it is best to start paying into one as early as possible.

If you work through your own limited company then you can actually allocate a portion of your net pay into a pension scheme and save on corporation and personal tax. Therefore by putting your salary into a pension you save on tax substantially.

Operating through a limited company means that you can fund your pension through your company. This means that by taking home a low tax efficient salary a contractor can save on national insurance contributions.

Written byJonathan London

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